Debt often gets a bad reputation, but not all debt is created equal. For Canadian families and business owners, the real question isn’t whether to avoid debt altogether, but how to distinguish between debt that helps build long-term wealth and debt that quietly erodes it. Understanding the difference is key to managing both your personal finances and your business with confidence.
The Case for Good Debt
Good debt is borrowing that finances something with long-term value or the potential to generate income. It’s a tool—when managed wisely—that can accelerate growth and improve financial outcomes.
For individuals, a mortgage on a principal residence is often considered good debt, particularly in Canada where real estate has historically appreciated over time. Similarly, borrowing to invest in education or professional training can yield higher lifetime earnings. For business owners, using debt to acquire equipment, expand operations, or purchase income-producing real estate can strengthen the balance sheet and open up new revenue streams.
The Trap of Bad Debt
By contrast, bad debt generally funds consumption, depreciating assets, or lifestyle spending that doesn’t create lasting value. High-interest credit cards are the clearest example. Carrying a balance month to month often means paying 20% or more in interest—a cost that compounds quickly and eats into future savings.
Personal loans or lines of credit used for non-essential spending fall into the same category. Even low-rate consumer financing for vehicles or discretionary purchases can create long-term drag, especially when the asset loses value faster than the debt is repaid. For business owners, using short-term debt to cover recurring operating expenses, without a clear path to repayment, can weaken financial resilience and increase risk if revenue slows.
Why the Distinction Between Good vs. Bad Debt Matters More Now
The cost of borrowing has swung dramatically in just a few years: the Bank of Canada took its policy rate from a pandemic low of 0.25% in 2020 up to 5.00% by July 2023, before beginning to ease in 2024 and cutting again to 2.50% on September 17, 2025.
Despite recent cuts, debt servicing remains a pressure point. Canada consistently ranks highest in the G7 for household debt-to-disposable income (over ~180% in recent years), underscoring our sensitivity to interest-rate swings.
Closer to home, Statistics Canada’s latest readings show the household credit-market debt-to-income ratio around 175%–175.5% through 2024–2025 (that’s about $1.75 owed for every $1 of disposable income), while the debt-service ratio has hovered near record levels (roughly 14.4%–15.0% of disposable income).
In this environment, “bad” debt—typically high-interest, unsecured, or tied to depreciating assets—erodes cash flow and resilience. By contrast, well-structured “good” debt can still be a tool: financing growth, funding succession or buyouts, and supporting tax-efficient strategies when aligned with a broader plan. The distinction matters more now because the carry cost of mistakes is higher, while the benefit of disciplined, purpose-built leverage remains intact when rates, terms, and structure are managed deliberately. (For context, the BoC’s rate path and current setting are primary drivers of those carry costs.)
Managing Debt in an Integrated Way
The difference between good and bad debt is not just about interest rates—it’s about context. A mortgage may be good debt if it’s affordable and aligned with long-term goals, but it can slip into “bad” territory if it strains cash flow or crowds out other priorities. Similarly, business loans can be powerful growth tools but become risky if taken without a clear repayment plan or revenue alignment.
That’s why reviewing debt strategy in the context of a broader financial plan is essential. Integrated planning considers the tax deductibility of interest, the opportunity cost of different types of borrowing, and how debt fits into retirement, succession, or estate goals. For many Canadian entrepreneurs, the right balance between good and bad debt is what separates financial stress from financial strength.
The Takeaway
Debt is neither inherently good nor bad—it’s a tool. Used wisely, it can help Canadians build wealth, expand businesses, and achieve personal goals faster. Used carelessly, it can create a cycle of costs that limit options and erode long-term security.
If your debt strategy hasn’t been revisited in light of today’s higher interest rates and evolving tax rules, now is a good time for a review. Speak with your CPA or advisor about whether your borrowing is working for you—or against you.
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